Growth stocks are attractive to many investors, as above-average financial growth helps these stocks easily grab the market's attention and produce exceptional returns. But finding a great growth stock is not easy at all.
That's because, these stocks usually carry above-average risk and volatility. In fact, betting on a stock for which the growth story is actually over or nearing its end could lead to significant loss.
However, the task of finding cutting-edge growth stocks is made easy with the help of the Zacks Growth Style Score (part of the Zacks Style Scores system), which looks beyond the traditional growth attributes to analyze a company's real growth prospects.
Cabot Microelectronics (CCMP) is on the list of such stocks currently recommended by our proprietary system. In addition to a favorable Growth Score, it carries a top Zacks Rank.
Research shows that stocks carrying the best growth features consistently beat the market. And for stocks that have a combination of a Growth Score of A or B and a Zacks Rank #1 (Strong Buy) or 2 (Buy), returns are even better.
While there are numerous reasons why the stock of this chip equipment maker is a great growth pick right now, we have highlighted three of the most important factors below:
Earnings growth is arguably the most important factor, as stocks exhibiting exceptionally surging profit levels tend to attract the attention of most investors. And for growth investors, double-digit earnings growth is definitely preferable, and often an indication of strong prospects (and stock price gains) for the company under consideration.
While the historical EPS growth rate for Cabot is 34.5%, investors should actually focus on the projected growth. The company's EPS is expected to grow 7% this year, crushing the industry average, which calls for EPS growth of 6.4%.
Cash Flow Growth
While cash is the lifeblood of any business, higher-than-average cash flow growth is more important and beneficial for growth-oriented companies than for mature companies. That's because, growth in cash flow enables these companies to expand their businesses without depending on expensive outside funds.
Right now, year-over-year cash flow growth for Cabot is 84.4%, which is higher than many of its peers. In fact, the rate compares to the industry average of -3.5%.
While investors should actually consider the current cash flow growth, it's worth taking a look at the historical rate too for putting the current reading into proper perspective. The company's annualized cash flow growth rate has been 33.2% over the past 3-5 years versus the industry average of 10.3%.
Promising Earnings Estimate Revisions
Superiority of a stock in terms of the metrics outlined above can be further validated by looking at the trend in earnings estimate revisions. A positive trend is of course favorable here. Empirical research shows that there is a strong correlation between trends in earnings estimate revisions and near-term stock price movements.
The current-year earnings estimates for Cabot have been revising upward. The Zacks Consensus Estimate for the current year has surged 7.3% over the past month.
While the overall earnings estimate revisions have made Cabot a Zacks Rank #2 stock, it has earned itself a Growth Score of B based on a number of factors, including the ones discussed above.
This combination indicates that Cabot is a potential outperformer and a solid choice for growth investors.
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